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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (20622)	6/30/2002 9:51:36 PM
From: AC Flyer	Read Replies (2) \| Respond to of 74559

Looks like low interest rates will be around for a while. Reuters Finance News Payoff for Hard-Workers - Low Rates? Jun 30 1:50pm ET By Victoria Thieberger NEW YORK (Reuters) - U.S. policymakers have long praised productivity gains for the lift they give to American living standards. But they may have another payoff as well. Cheap money. Recent steep increases in productivity could boost the pace at which the giant U.S. economy can grow without spurring inflation, even above impressive levels seen in the 1990s -- giving the Federal Reserve one more reason why it can delay a hike in interest rates. No lesser person than Fed Chairman Alan Greenspan has raised that prospect. "I'm reasonably sure that with the very considerable increase in productivity that we have seen, especially in the last six months... something fundamental happened in our system that will be a material positive factor for long-term growth," Greenspan said earlier this month. Until the mid 1990s, economic dogma held that the U.S. could only grow at a 2.5 percent annual rate before the Fed had to raise interest rates to staunch inflationary pressures. Then during the boom years of the late 1990s, annual growth in productivity -- the amount of goods and services workers churn out per hour -- almost doubled to a 2.5 percent average rate from 1.3 percent in the period from 1980 until the mid 1990s. Fed policymakers began a growth experiment. They kept the monetary reins slack and allowed the economy to grow at an average annual pace of 4.1 percent, compared with 2.7 percent from 1980 to the mid 1990s. Inflation stayed quiescent. Donald Kohn, a candidate for the Fed board and top aide to Greenspan, recently called this upward shift in growth over the 1990s "the dominant economic development of the last decade." The big surprise now is that productivity has held high even through last year's recession -- surging at an 8.4 percent annual rate in the first quarter of this year. This rare feat has some Wall Street economists thinking the economy may be able to grow even faster than it did in the late 1990s. And that could mean that if companies can keep squeezing gains out of workers and using technology to raise their output, the Fed can keep rates low for many months to come. RAISING THE SPEED LIMIT San Francisco Federal Reserve President Robert Parry hinted at this tantalizing prospect in a speech to an economists' group last week. "The most recent remarkable surge in productivity growth temporarily lowers inflation," Parry said. "As a result, it reduces the need to tighten in the short term." At its meeting last week, Fed left the benchmark federal funds rate at 1.75 percent. Quite apart from productivity gains, with the economic recovery turning patchy in the past couple of months and jobs growth still sluggish, most analysts believe the Fed will not need to lift interest rates from four-decade lows until November at the earliest. Gross domestic product is seen slowing from its dazzling 6.1 percent rate in the March quarter to hover between 2 percent and 3 percent through the summer -- well below potential growth rate, or the speed limit, and the point where spare capacity at factories gets used up and unemployed workers find jobs. "Most people are not expecting 3.5 percent GDP growth this year, and quite frankly you're not going to take up too much of the slack till you get up above potential GDP growth," said Lehman Bros. economist Drew Matus. "So there's a lot of room to move here before the Fed has to worry about slamming on the brakes. And the reason they have room to move is this fundamental shift in productivity." THE KEY DEVELOPMENT Exactly how fast the world's largest economy can grow before bottlenecks cause problems is still up for debate. But it has been marked up dramatically as productivity improved. Over the 1990s, the magic number rose to a 3.5 percent average annual rate from 2.5 percent in the 1980s. Analysts at Merrill Lynch now estimate the upside limit for economic growth could be as high as 4 percent. They forecast that productivity growth will average around 3 percent a year. Add that onto usual growth in the labor force of about 1 percent a year, and hence the annual growth rate of 3 percent to 4 percent. J.P. Morgan economist James Glassman wonders if it isn't even higher still. "After Sept. 11, everybody scaled back their expectations for potential, but now watching those Q4 and Q1 (productivity) numbers, people have gotten more optimistic again," he said, although he hasn't set a number on it. Economists had worried that all the extra security and defense measures put in place to deter terror attacks would slow business and raise costs, weighing on productivity. But it may not be working out that way. Recent Fed studies put a more conservative figure on productivity trends, saying 2 percent to 2.5 percent looks achievable. That would translate to a growth rate of 3 percent to 3.5 percent before inflation becomes a worry and interest rates must be raised. Fed policymakers, however, clearly are keeping an open mind. They discussed the issue at the March 19 Federal Open Market Committee meeting, minutes show, but they didn't put a figure on whether higher growth is achievable. "We're really kind of splitting hairs in the sense that we have so much trouble measuring productivity anyway," Minneapolis Fed President Gary Stern told Reuters last month. "But there's no question even a couple of tenths of a (percentage) point makes a real difference to growth and living standards over time."